1. Granting a tax deduction for corporate interest enables financial leverage to increase a firm's value by:

a. increasing EBIT.

b. decreasing the lender's share of EBIT.

c. decreasing the government's share of EBIT.

d. b and c

2. Which of the following is most correct?

a. When the return on capital employed (ROCE) is less than the before tax cost of debt, a company can increase its ROE by trading out equity and into debt.

b. When the return on capital employed (ROCE) is less than the after tax cost of debt, a company can increase its ROE by trading out equity and into debt.

c. When the return on capital employed (ROCE) is more than the before tax cost of debt, a company can increase its ROE by trading out equity and into debt.

d. When the return on capital employed (ROCE) is more than the after tax cost of debt, a company can increase its ROE by trading out equity and into debt.